The Dow Jones Industrial Average fell 12.7 points, or 0.08%, to 15295, the S&P 500 dropped 4.8 points, or 0.29%, to 1651 and the Nasdaq Composite skidded 3.9 points, or 0.11%, to 3459.

The blue chips had been down as much as 127 points at session lows, but trimmed those losses on the heels of the housing data.

New home sales rose 2.3% in April to an annualized pace of 454,000 units, the Commerce Department said, besting forecasts from economists for an increase to 426,000. The median price jumped 14.9% year-over-year to $271,600 -- the highest price on records since January 1963.

The U.S. also revised up its estimate of March new home sales to a pace of 444,000 units.

Still, mounting concerns about the global economy and central bank easing have shaken what appeared to be unshakable investor confidence. The Japanese Nikkei 225 plunged 7.3% overnight in its worst rout in two years on the back of an uncharacteristically weak U.S. session. European markets followed suit later in the morning, with benchmark indexes in the UK, Germany and France all sliding more than 2%.

Chris Beauchamp, a market analyst at IG, pointed to a range of factors for the sudden lurch lower in equities. He said minutes Wednesday from the Federal Reserve, combined with commentary from Fed chief Ben Bernanke and weak China data created a toxic combination for the markets.

Still, Dan Greenhaus, chief global strategist at BTIG, said the big selloff should be taken in context: "Japanese equities were higher by over 70% since November and while the decline in one day was quite large, it still represents just 10% of the overall move," he wrote in an e-mail.

Markets Turn Mixed After Race to Safety Fades

U.S. markets were mixed. The telecommunications sector led the gainers, while financials and utilities were the biggest losers.

The VIX, seen as Wall Street's fear gauge, surged some 8%, but then pared those gains to just north of 2%. Gold jumped $18.40, or 1.3%, to $1,386 a troy ounce. The yield on the 10-year fell 0.049-percentage point to 1.997%.

Gloomy China Data Spark Growth Worries

China's manufacturing sector unexpectedly contracted in May, according to a report from HSBC. The bank's gauge fell to 49.6 for the month, from 50.4 the month before, compared to expectations that it would hold steady. Readings above 50 point to expansion, while those below indicate contraction.

"The cooling manufacturing activities in May reflected slower domestic demand and ongoing external headwinds," Hongbin Qu, the bank's chief economist for China wrote in the report. "A sequential slowdown is likely in the middle of [the second quarter], casting downside risk to China’s fragile growth recovery."